A&W Revenue Royalties Income Fund. First Quarter Report to Unitholders for the period ended March 25, 2018

Transcription

1 A&W Revenue Royalties Income Fund Q1 First Quarter Report to Unitholders for the period ended March 25, 2018

2 Report to Unitholders 1 A&W Revenue Royalties Income Fund Management Discussion and Analysis 2 Financial Statements 21 Notes to the Interim Financial Statements 24 Unitholder Information 30

3 To our Unitholders On behalf of the Trustees of the A&W Revenue Royalties Income Fund (the Fund), I am pleased to report the results of the quarter ended March 25, The Fund, through its investment in A&W Trade Marks Inc. (Trade Marks), owns the A&W trade-marks and licenses them to A&W Food Services of Canada Inc. (A&W Food Services), in exchange for a royalty of 3% of sales reported by the A&W restaurants in the Royalty Pool. The Royalty Pool is adjusted annually to include sales from net new A&W restaurants opened by A&W Food Services over the previous year. The Royalty Pool was increased from 861 to 896 restaurants on January 5, Same store sales growth was +5.3% for the quarter, as compared to the same quarter of Total royalty income for the quarter increased by 9.2%. These strong results are reflective of the guest response to strategic initiatives aimed to build the competitiveness of the A&W brand, to enhance performance over the long term and provide increased royalty income to the Fund. Same store sales increases are the primary driver of growth in distributable cash per unit, and as a result of the strong performance, we are pleased to be able to increase monthly distributions, from 13.6 per unit to 13.8 per unit. This brings the annualized rate of distribution to $ Distributable cash of $5,770,000 was generated in the first quarter of 2018, an increase of $483,000 compared to $5,287,000 in the same quarter of Distributable cash per unit increased to 34.4 per unit from 33.1 for the first quarter of 2017 due to higher royalty income. Distributions of 27.2 per unit were declared in the quarter. I would like to express the appreciation of the Trustees to Mr. Jefferson Mooney for all his contributions over the years. Jeff has been a director since 2002 and recently stepped down. We welcome Paul Hollands to the Board of Trade Marks. Paul is also serving as Chairman of A&W Food Services since he retired from his role as CEO earlier this year. In summary, we are pleased with the impact that A&W s strategy is having and have confidence that it will continue to grow royalty income for the Fund. We are also delighted that we are able to share the continued success of the business once again with our unitholders through increased distributions. John R. McLernon Chairman, A&W Revenue Royalties Income Fund On behalf of the Board of Trustees 1

4 A&W Revenue Royalties Income Fund Management Discussion and Analysis This Management Discussion and Analysis (MD&A) covers the first quarter period from January 1, 2018 to March 25, 2018, and is dated May 1, This MD&A should be read in conjunction with the unaudited interim condensed financial statements of A&W Revenue Royalties Income Fund (the Fund) for the quarter ended March 25, 2018 and the audited annual consolidated financial statements of the Fund for the year ended December 31, Readers are also referred to the unaudited interim condensed consolidated financial statements of A&W Food Services of Canada Inc. (Food Services) for the quarter ended March 25, 2018 and the audited annual consolidated financial statement of Food Services for the 52 week year ended December 31, Such financial statements and additional information about the Fund and Food Services are available at or The financial results reported in this MD&A are derived from the unaudited interim condensed financial statements of the Fund, which are prepared in accordance with International Financial Reporting Standards (IFRS) as applicable to interim financial reports, including International Accounting Standards (IAS) 34, Interim Financial Reporting. The accounting policies applied in the interim condensed financial statements and this report are consistent with those followed in the preparation of the Fund s annual consolidated financial statements for the year ended December 31, 2017, with the exception of the adoption of IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers. IFRS 9 Financial Instruments The Fund has adopted IFRS 9 effective January 1, 2018, retrospectively without restatement of comparatives. The new standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The Fund classifies all its financial assets and liabilities at amortized cost. Under IFRS 9, the Fund assesses on a forward looking basis the expected credit losses associated with financial assets carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Fund applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. The adoption of this standard had no impact on the consolidated financial statement and no adjustments to opening retained earnings as at January 1, 2018 were necessary. IFRS 15 Revenue from Contracts with Customers The Fund has adopted IFRS 15 effective January 1, 2018, using the full retrospective method without the use of practical expedients. The timing of the recognition of revenue has not changed as a result of adopting the new guidance. The adoption of this standard had no impact on the consolidated financial statement and no adjustments to opening retained earnings as at January 1, 2018 were necessary. The Fund uses a fiscal year ending December 31. Food Services uses a fiscal year comprising a 52 or 53 week period ending on the Sunday nearest December 31. Food Services fiscal 2017 year was 52 weeks and ended December 31, 2017 ( weeks ended January 1, 2017). To 2

5 align its financial reporting with that of Food Services, the Fund s first quarter of 2018 ended March 25, 2018 (2017 March 26, 2017), 12 weeks after Food Services fiscal year end. Readers should be aware that 2018 Q1 results are not directly comparable to 2017 Q1 results, as there were 84 days of sales in Q1, 2018 compared to 85 days in Q1, Same store sales growth is based on an equal number of days in each quarter. HIGHLIGHTS Same store sales (1) for the first quarter of 2018 grew by +5.3% as compared to the same quarter of Total sales in the Royalty Pool (as hereinafter defined) and royalty income increased by 9.2% in the first quarter compared to the first quarter of Q1 net income increased in 2018 by 16%. Distribution to be increased by 1.5%. (1) Same store sales and same store sales growth do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. This important information is provided as it is a key driver of growth in the Fund. Same store sales growth is based on an equal number of days in each quarter and year. See Sales Performance. The following selected information, other than Same store sales growth, Total distributable cash generated for distributions and dividends, Distributable cash per equivalent unit and Net income, excluding non-cash items have been derived from financial statements prepared in accordance with IFRS and all dollar amounts are reported in Canadian currency. (dollars in thousands except per unit amounts) Period from Jan 1, 2018 to Mar 25, 2018 Period from Jan 1, 2017 to Mar 26, 2017 Same store sales growth (1) +5.3% -0.3% Number of restaurants in the Royalty Pool Sales reported by the restaurants in the Royalty Pool $267,688 $245,157 Royalty income $8,031 $7,355 General and administrative expenses Net third party interest expense Current income tax provision 1,360 1,193 Total distributable cash generated for distributions and dividends (2) $5,770 $5,287 Distributable cash per equivalent unit ( ,760,352 units; ,015,038 units) (2)(3) $0.344 $0.331 Distributions and dividends declared per equivalent unit $0.272 $0.266 Net income (4) $6,305 $5,424 Net income, excluding non-cash items (4) $5,883 $5,437 (1) Same store sales growth does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. This information is provided as it is a key driver of growth in the Fund. Same store sales growth is based on an equal number of days in each quarter and year. See Sales Performance. 3

6 (2) Distributable cash and distributable cash per equivalent unit do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. This information is provided as it identifies the amount of actual cash generated to pay distributions to unitholders and dividends to Food Services. See Distributable Cash. (3) The number of equivalent units and distributable cash per equivalent unit in 2018 includes the 149,063 LP units (as hereinafter defined) exchangeable for 298,126 common shares of Trade Marks (as hereinafter defined) representing the remaining 20% of the consideration for the January 5, 2018 adjustment to the Royalty Pool which is held back until December 2018 when the actual annual sales are reported by the new restaurants. The number of equivalent units and distributable cash per equivalent unit in 2017 includes the 150,665 LP units exchanged for 301,330 common shares of Trade Marks representing the final consideration paid in December 2017 for the January 5, 2017 adjustment to the Royalty Pool. (4) Net income in 2018 and 2017 includes non-cash gains and losses on an interest rate swap, amortization of deferred financing fees and deferred income taxes. These non-cash items have no impact on the Fund s ability to pay distributions to unitholders. The Fund s net income excluding these non-cash items is presented for information purposes only. Net income excluding noncash items does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. SALES PERFORMANCE Same store sales growth by A&W restaurants for which the royalty is payable (the Royalty Pool) by Food Services to A&W Trade Marks Limited Partnership (the Partnership) is a key performance indicator for the Fund. Same store sales growth is the change in sales of A&W restaurants in the Royalty Pool that operated during the entire 26 4-week periods ending March 25, Same store sales for the first quarter of 2018 increased by 5.3% as compared to the same quarter of Same store sales growth continued to build on the momentum gained last year, despite unfavourable weather in several parts of the country. The improvement in same store sales was seen across the country, except in Saskatchewan which continues to be affected by a weaker economy and the introduction of a new 6% provincial sales tax on restaurant meals on April 1, The chart below shows the percentage change in same store sales by A&W restaurants for the eight most recently completed quarters. Total sales reported by A&W restaurants in the Royalty Pool for the first quarter of 2018 were $267,688,000, an increase of 9.2% from sales of $245,157,000 for the first quarter of The increase in sales was due to the increase in the number of A&W restaurants in the Royalty Pool and same store sales growth, partially offset by the decrease in the number of days of sales in the quarter. The Fund is pleased to announce that, as a result of the performance by restaurants in the Royalty Pool, the monthly distribution to unitholders will increase from 13.6 per unit to 13.8 per unit 4

7 beginning with the April 2018 distribution which is payable on May 31, The new distribution rate translates into an annualized distribution rate of $1.656 per unit, an increase of 1.5% from the prior level of $1.632 per unit. OVERVIEW The Fund is a limited purpose trust established in 2001 under the laws of the Province of British Columbia pursuant to the Declaration of Trust. The units of the Fund trade on the Toronto Stock Exchange under the symbol AW.UN. The Fund s place of business is located at West Esplanade, North Vancouver, BC. The Fund was established to invest in A&W Trade Marks Inc. (Trade Marks), which through its ownership interest in the Partnership, owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The Partnership has granted Food Services a licence (the Amended and Restated Licence and Royalty Agreement) to use the A&W trade-marks in Canada for a term expiring December 30, 2100, for which Food Services pays a royalty of 3% of the sales reported to Food Services by A&W restaurants in the Royalty Pool. Food Services is a leading franchisor of hamburger quick service restaurants in Canada. The Partnership distributes its available cash, after satisfaction of any debt service, provision for operating and other expenses and any amounts retained as reserves, by way of distributions on limited partnership units (LP units) held by Trade Marks. Trade Marks subsequently distributes its available cash, after satisfaction of debt service and income tax obligations, provisions for administrative expenses of Trade Marks and the Fund, and retention of reasonable working capital reserves, by way of dividends on its common shares held by the Fund and Food Services. The Fund in turn makes distributions to unitholders. Trade Marks general and administrative expenses include the expenses of the Fund as the Fund has entered into an administration agreement with Trade Marks whereby Trade Marks, at its expense, provides or arranges for the provision of services required in the administration of the Fund. A key attribute of the Fund is that the distributable cash available to make distributions to unitholders is based on the sales of the A&W restaurants in the Royalty Pool, less operating expenses associated with operating the Fund, interest and taxes. The Fund is a top-line fund, meaning it is not subject to variability of earnings or expenses associated with an operating business. Another important aspect of the Fund is that Food Services owns the equivalent of 24.7% ( %) of the units of the Fund through its ownership of common shares of Trade Marks. As a result, interests of Food Services are closely aligned with the interests of unitholders. Growth in the Fund is achieved in two ways: first, and most importantly, by increasing the same store sales of the A&W restaurants in the Royalty Pool, and second by adding new A&W restaurants to the Royalty Pool each year. The Royalty Pool is adjusted annually to reflect sales from new A&W restaurants added to the Royalty Pool, net of the sales of any A&W restaurants that have permanently closed. Food Services is paid for the additional royalty stream related to the sales of the net new restaurants, 5

8 based on a formula set out in the Amended and Restated Licence and Royalty Agreement. The formula provides for a payment to Food Services based on 92.5% of the amount of estimated sales from the net new A&W restaurants and the current yield on the units of the Fund, adjusted for income taxes payable by Trade Marks. The consideration is paid to Food Services in the form of additional LP units. The additional LP units are, at the option of Food Services, exchangeable for additional common shares of Trade Marks, which are in turn exchangeable for units of the Fund on the basis of two common shares for one unit of the Fund. ADJUSTMENT TO THE ROYALTY POOL The 2018 adjustment to the Royalty Pool took place on January 5, The number of A&W restaurants in the Royalty Pool was increased by 42 new restaurants less seven restaurants that permanently closed during The addition of these 35 net new restaurants brings the total number of A&W restaurants in the Royalty Pool to 896. The estimated annual sales of the 42 new A&W restaurants are $55,642,000 and annual sales for the seven permanently closed restaurants were $3,210,000. The initial consideration for the estimated additional royalty stream was $25,989,000, calculated by discounting the estimated additional royalties by 7.5% and dividing the result by the yield on units of the Fund for the 20 trading days ending October 30, The yield was adjusted to reflect income tax payable by Trade Marks. The Partnership paid Food Services 80% of the initial consideration or $20,791,000 by issuance of 596,251 LP units which were subsequently exchanged for 1,192,502 non-voting common shares of Trade Marks. The remaining 20% of the consideration or $5,198,000 will be paid in December 2018 by issuance of additional LP units, which may be exchanged for non-voting common shares of Trade Marks. The actual amount of the consideration paid in December 2018 may differ from this amount depending on the actual annual sales reported by the new A&W restaurants. COMMON SHARES OF TRADE MARKS The common shares of Trade Marks are owned by the Fund and Food Services. On March 3, 2017, Food Services exchanged 746,600 common shares of Trade Marks for 373,300 units of the Fund, which were then sold at a price of $39.25 per unit. The Fund did not receive any proceeds of the sale of the units. The common shares of Trade Marks are owned by the Fund and Food Services as follows: 6

9 (dollars in thousands) Fund Food Services Total Number of shares Trade Marks book value $ % Number of shares Trade Marks book value $ % Number of shares Trade Marks book value $ Balance as at December 31, ,262, , ,773,229 66, ,035, ,779 January 5, 2017 adjustment to the Royalty Pool (1) - - (2.4) 994,102 17, ,102 17,273 March 3, 2017 exchange of common shares for units of the Fund 746,600-7, (746,600) (7,814) (2.3) - - Balance as at December 31, ,009, , ,020,731 75, ,030, ,052 January 5, 2018 adjustment to the Royalty Pool (1) - - (2.8) 1,192,502 20, ,192,502 20,791 Balance as at March 25, ,009, , ,213,233 96, ,222, ,843 (1) The number of common shares does not include the 149,063 LP units exchangeable for 298,126 common shares of Trade Marks representing the remaining 20% of the consideration for the January 5, 2018 adjustment to the Royalty Pool which is held back until December 2018 when the actual annual sales are reported by the new restaurants. OWNERSHIP OF THE FUND The ownership of the Fund, on a fully-diluted basis, is as follows: March 25, 2018 December 31, 2017 Number of Number of units % units % Fund units held by public unitholders 12,504, ,504, Number of Fund units issuable upon exchange of securities of Trade Marks held by Food Services (1) 4,106, ,510, Total equivalent units 16,611, ,015, (1) Common shares of Trade Marks held by Food Services may be exchanged for units of the Fund on the basis of two common shares for a unit of the Fund. The following chart shows the ownership of the Fund, on a fully-diluted basis, when the remaining 20% of the consideration for the January 5, 2018 adjustment to the Royalty Pool is expected to be paid in December 2018, by issuance of 149,063 LP units exchangeable for 298,126 common shares of Trade Marks. The actual amount of the consideration paid in December 2018 may differ from this amount depending on the actual annual sales reported by the new A&W restaurants. 7

10 Number of units % Fund units held by public unitholders 12,504, Number of Fund units issuable upon exchange of securities of Trade Marks held by Food Services 4,255, Total equivalent units 16,760, FINANCIAL RESULTS INCOME Royalty income for the first quarter of 2018 was $8,031,000 based on sales of $267,688,000. This was an increase of 9.2% from royalty income of $7,355,000 and sales of $245,157,000 for the first quarter of There were 84 days of sales in the first quarter of 2018 as compared to 85 days in the same quarter of The increase in sales and royalty income was due to the additional net 35 new A&W restaurants in the Royalty Pool and the 5.3% increase in same store sales, less the impact of one less day in the quarter. EXPENSES The Fund s cash expenses excluding income taxes were as follows: (dollars in thousands) Period from Jan 1, 2018 to Mar 25, 2018 Period from Jan 1, 2017 to Mar 26, 2017 General and administrative $307 $271 Net interest on term loan and other $594 $604 General and administrative expenses for the first quarter of 2018 increased by $36,000 to $307,000 compared to $271,000 for the first quarter of The increase was primarily due to higher TSX filing fees and professional fees. Interest on the term loan was $594,000 for the first quarter of 2018, $10,000 lower compared to the first quarter of The decrease was due to the number of days in the quarter and a decrease in the effective interest rate. GAIN ON INTEREST RATE SWAP The Fund s net income included non-cash gains on the interest rate swap equal to the change in the fair value of the interest rate swap. These non-cash items had no impact on the Fund s cash available to pay distributions. (dollars in thousands) Period from Jan 1, 2018 to Mar 25, 2018 Period from Jan 1, 2017 to Mar 26, 2017 Gain on interest rate swap ($659) ($38) See Liquidity and Capital Resources. 8

11 INCOME TAXES The Fund s provision for (recovery of) income taxes was as follows: (dollars in thousands) Current Period from Jan 1, 2018 to Mar 25, 2018 Period from Jan 1, 2017 to Mar 26, 2017 Current income tax provision $1,360 $1,193 Refundable income tax (113) (150) Deferred Total provision for income taxes $1,476 $1,086 The Fund as a legal entity is not currently taxed on its income as dividends received from Trade Marks are not subject to the tax on Specified Investment Flow-Through (SIFT) trusts which applies to income trusts such as the Fund. The provision for income taxes on the Fund s consolidated statement of income is the expected current and deferred tax payable by Trade Marks as a legal entity. Trade Marks taxable income is taxed at an effective rate of 20.0% ( %), plus an additional tax of 30.67% ( %) on investment income which is refundable at a rate of 38.33% ( %) of each dollar Trade Marks pays out in taxable dividends to its shareholders. Trade Marks provision for income taxes for the first quarter of 2018 includes a recovery of refundable income tax of $113,000 based on its first quarter share of annual estimated taxable income and dividends in Under IFRS, refundable income tax is recognized on the income statement when it is paid or payable and subsequently when it is received or receivable. Management expects that the remaining $1,545,000 refundable income tax paid in 2016 will be recovered in future years when sufficient dividends are paid by Trade Marks. The current income tax provision excluding refundable income tax is $167,000 higher than the prior year due to an increase in earnings before income taxes and from the increase in British Columbia s general corporate tax rate from 19% in 2017 to 20% in Deferred income tax is recorded on the temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is a non-cash item and has no impact in the current year on the Fund s cash available to pay distributions. 9

12 NET INCOME AND COMPREHENSIVE INCOME Net income and comprehensive income was as follows: (dollars in thousands) Net income and comprehensive income attributable to unitholders of the Fund Net income and comprehensive income attributable to Food Services noncontrolling interest in Trade Marks Total net income and comprehensive income Period from Jan 1, 2018 to Mar 25, 2018 Period from Jan 1, 2017 to Mar 26, 2017 $4,924 $4,183 1,381 1,241 $6,305 $5,424 DISTRIBUTABLE CASH The distributable cash and payout ratio measures are provided as they identify the amount of actual cash generated to pay distributions to unitholders and dividends to Food Services and provide information regarding the extent to which the Fund distributes cash. The distributable cash and payout ratios do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. Distributable cash is calculated as the operating cash flows of the Fund, adjusted for net changes in items of working capital. Changes in items of working capital are excluded as the Fund s working capital requirements are not permanent and are primarily due to the timing of payments between related parties. No deduction is made for capital expenditures as the Fund has no capital expenditures. There are no restrictions on distributions arising from compliance with financial covenants. The payout ratio is calculated by dividing the total of (i) distributions declared per unit plus (ii) accrued distributions per unit to the last day of the quarter or year, as applicable, by the distributable cash per unit generated in that period. As discussed under Income Taxes, Trade Marks provision for income taxes includes refundable income tax paid or recoverable. This refundable income tax is not deducted in calculating the amount of distributable cash generated, in order to more accurately reflect the actual amount of cash generated by the business to pay distributions to unitholders and dividends to Food Services. In 2016 the refundable income tax expense was $2,029,000. There was a sufficient surplus of cash on hand to pay the refundable income tax. Trade Marks provision for income taxes for 2017 includes a recovery of refundable income tax of $371,000. The Q provision includes an additional recovery of $113,000. Management expects that the remaining $1,545,000 refundable income tax paid in 2016 will be recovered in future years when sufficient dividends are paid by Trade Marks. 10

13 The following chart reconciles distributable cash to net cash generated from operating activities including net changes in items of working capital, the most directly comparable measure calculated in accordance with IFRS. (dollars in thousands except per unit amounts) Period from Jan 1, 2018 to Mar 25, 2018 Period from Jan 1, 2017 to Mar 26, 2017 Net cash generated from operating activities $5,849 $5,442 Changes in non-cash working capital including interest and tax (79) (155) Distributable cash generated (1) $5,770 $5,287 Cumulative surplus beginning of period 3,363 2,417 Distributable cash for unitholders at current annual distribution rate ( $1.632 per unit, $1.596 per unit) (1) Distributable cash for Food Services at equivalent annual distribution rate ( $1.632 per equivalent unit, $1.596 per equivalent unit) (1) (4,697) (4,546) (1,598) (1,382) Refundable income tax (see Income Taxes ) Cumulative surplus end of period $2,951 $1,926 Number of equivalent units (1) 16,760,352 15,950,970 Distributable cash generated per equivalent unit (1) $0.344 $0.331 Monthly distributions declared per unit (2) $0.272 $0.266 Total distributions declared and accrued per unit $0.376 $0.372 Payout ratio (3) 109.2% 112.4% (1) The number of equivalent units and distributable cash per equivalent unit in 2018 includes the 149,063 LP units (as hereinafter defined) exchangeable for 298,126 common shares of Trade Marks (as hereinafter defined) representing the remaining 20% of the consideration for the January 5, 2018 adjustment to the Royalty Pool which is held back until December 2018 when the actual annual sales are reported by the new restaurants. The number of equivalent units and distributable cash per equivalent unit in 2017 includes the 150,665 LP units exchanged for 301,330 common shares of Trade Marks representing the final consideration paid in December 2017 for the January 5, 2017 adjustment to the Royalty Pool. (2) In accordance with the Fund s Declaration of Trust, the Fund declares and records distributions in respect of any particular calendar month at the beginning of the immediate subsequent month, with the exception of the distribution for December of each year, which is declared and recorded in December of each year. Distributions in respect of any particular calendar month are paid on the last business day of the immediate subsequent month. The distributions declared in the first quarter of each year are in respect of the calendar months January and February. (3) The payout ratio is calculated by dividing the total distributions per unit (which includes distributions declared and distributions accrued to the last day of the quarter or year, as applicable) by distributable cash per unit generated in that period. This information is provided as it identifies the extent to which distributable cash is distributed to unitholders and Food Services. Distributable cash generated in the first quarter of 2018 to pay distributions to unitholders and dividends to Food Services was $5,770,000 compared to $5,287,000 in the first quarter of The $483,000 increase in distributable cash was comprised of the $676,000 increase in royalty income less the $26,000 net increase in general and administrative expenses, financing fees and interest expense and a $167,000 increase in the current income tax provision (excluding refundable income tax). 11

14 Distributable cash generated per equivalent unit increased by 1.4 to 34.4 per unit in the first quarter of 2018 from 33.1 for the first quarter of Two monthly distributions totalling 27.2 per unit were declared in the first quarter of 2018 compared to 26.6 per unit in the same quarter of The payout ratio for the first quarter of 2018 was 109.2% compared to 112.4% for the same quarter of The Fund s objective is to maintain an annual payout ratio at or below 100%, however as the fund strives to provide unitholders with regular monthly distributions, and as a result of seasonality of sales in A&W restaurants, the Fund historically experiences seasonal fluctuations in its payout ratio. The following table shows the trailing four quarter payout ratios for 2016, 2017 and The cumulative surplus of distributable cash at the end of the first quarter of 2018 was $2,951,000, compared to a cumulative surplus of $3,363,000 at the beginning of the year. Due to the performance by restaurants in the Royalty Pool, the monthly distribution to unitholders will increase from 13.6 per unit to 13.8 per unit beginning with the April 2018 distribution which is payable on May 31, The new distribution rate translates into an annualized distribution rate of $1.656 per unit, an increase of 1.5% from the prior level of $1.632 per unit. The Fund s policy is to distribute all available cash in order to maximize returns to unitholders over time, after allowing for reasonable reserves. The Fund s trustees review distribution levels on a regular basis and any change in distributions will be implemented with a view to maintain the continuity of uniform monthly distributions. DISTRIBUTIONS TO UNITHOLDERS Distributions declared and paid during 2018 year to date were as follows: (dollars in thousands except per unit amounts) Month Record date Amount Per unit January February 15, 2018 $1,701 $0.136 February March 15, , $3,402 $

15 The February 2018 distribution was declared on March 5, 2018 and paid on March 30, 2018 and is reported as a current liability as at March 25, On April 4, 2018 the Fund declared the March 2018 monthly distribution to unitholders of 13.6 per unit or $1,701,000, payable on April 30, TAX TREATMENT OF DISTRIBUTIONS All of the distributions declared in 2018 year to date are designated as non-eligible dividends. DIVIDENDS ON TRADE MARKS COMMON SHARES During 2018 year to date, Trade Marks declared and paid dividends on its voting and non-voting common shares as follows: (dollars in thousands except per share amounts) Month declared/paid Per share Aggregate amount paid to the Fund Aggregate amount paid to Food Services January $ $1,701 $559 February , $ $3,402 $1,118 The February dividend was paid on March 31, 2018 and Food Services share of $559,000 is reported as a current liability as at March 25, On April 4, 2018 Trade Marks declared an aggregate dividend on its voting and non-voting common shares of $2,259,000 payable to Food Services and the Fund on April 30, SEASONALITY Sales at A&W restaurants fluctuate seasonally. In freestanding A&W restaurants, weather impacts sales. In A&W restaurants in shopping centres, sales fluctuate due to higher traffic during the back-to-school and Christmas shopping seasons. SUMMARY OF QUARTERLY RESULTS The following selected quarterly results, other than Distributable cash and Distributable cash per equivalent unit, have been prepared in accordance with IFRS and all dollar amounts are reported in Canadian currency. 13

16 (dollars in thousands except per unit amounts) Number of restaurants in the Royalty Pool Royalty income $8,031 $11,181 $8,905 $8,224 General and administrative expenses Term loan and other interest expense Amortization of deferred financing fees Non cash gain on interest rate swap (659) (464) (1,945) (260) Current income tax expense 1,360 1,879 1,457 1,456 Refundable income tax recovery (113) (145) (-) (76) Deferred income tax expense Net income $6,305 $8,160 $8,241 $6,395 Distributable cash (1) $5,770 $8,119 $6,779 $6,094 Number of equivalent units (2) 16,760,352 16,015,038 15,950,970 15,950,970 Distributable cash per equivalent unit (1)(2) $0.344 $0.507 $0.425 $0.382 Monthly distributions declared per unit (3) $0.272 $0.541 $0.399 $0.399 Number of days in the quarter Q1 Q4 Q3 Q2 (dollars in thousands except per unit amounts) Number of restaurants in the Royalty Pool Royalty income $7,355 $10,545 $8,354 $7,922 General and administrative expenses Term loan and other interest expense Amortization of deferred financing fees Non cash gain on interest rate swap (38) (1,986) (26) (161) Current income tax expense 1,193 1,982 1,596 1,519 Refundable income tax (recovery) expense (150) Deferred income tax (recovery) expense (128) (108) Net income $5,424 $8,973 $5,856 $5,758 Distributable cash (1) $5,287 $7,568 $6,109 $5,754 Number of equivalent units (2) 15,950,970 15,517,988 15,517,988 15,517,988 Distributable cash per equivalent unit (1)(2) $0.331 $0.488 $0.393 $0.371 Monthly distributions declared per unit (3) $0.266 $0.532 $0.396 $0.380 Number of days in the quarter Q Q Q Q (1) Distributable cash and distributable cash per equivalent unit do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. This information is provided as it identifies the amount of actual cash available to pay distributions to unitholders and dividends to Food Services. See Distributable Cash. (2) The number of equivalent units and distributable cash per equivalent unit in 2018 includes the 149,063 LP units (as hereinafter defined) exchangeable for 298,126 common shares of Trade Marks (as hereinafter defined) representing the remaining 20% of the consideration for the January 5, 2018 adjustment to the Royalty Pool which is held back until December 2018 when the actual annual sales are reported by the new restaurants. The number of equivalent units and distributable cash per equivalent unit in 2017 includes the 150,665 LP units exchanged for 301,330 common shares of Trade Marks representing the final consideration paid in December 2017 for the January 5, 2017 adjustment to the Royalty Pool. (3) The distribution for December of each year, which is paid on January 31 of the following year, is declared and recorded in the year in which it is earned. Therefore, four monthly distributions are declared in the fourth quarter of each year, and two monthly distributions are declared in the first quarter of each year. 14

17 LIQUIDITY AND CAPITAL RESOURCES The Fund s policy is to distribute all available cash in order to maximize returns to unitholders over time, after allowing for reasonable reserves. In light of seasonal variances inherent to the restaurant industry and fluctuations in business performance, the Fund s policy is to make equal distribution payments to unitholders on a monthly basis in order to smooth out these fluctuations. The Fund s trustees review distribution levels on a regular basis and any change in distributions will be implemented with a view to maintain the continuity of uniform monthly distributions. It is expected that future distributions will continue to be funded entirely by cash flow from operations and the cash reserve. Trade Marks has a $2,000,000 demand operating loan facility with a Canadian chartered bank (the Bank) to fund working capital requirements and for general corporate purposes. Amounts advanced under the facility bear interest at bank prime rate plus 0.4% and are repayable on demand. As at May 1, 2018 and March 25, 2018, the amount of the facility available was $2,000,000 (December 31, $2,000,000). On December 22, 2017 Trade Marks entered into an agreement to refinance its $60,000,000 term loan with the Bank. The new term loan is repayable on December 22, 2022, and contains the same covenants as the original term loan including the requirement to meet certain earnings before interest, taxes, depreciation, amortization and non-cash charges/income (EBITDA) levels and debt to EBITDA ratios during each trailing four quarter period. Interest only is payable monthly, providing that Trade Marks EBITDA tested quarterly on a trailing four quarters basis is not less than specified amounts. In the event that EBITDA is less than these specified amounts, the term loan will be fully amortized over the greater of three years and the remaining term and repayment will be by way of blended monthly instalments of principal and interest. Trade Marks is generally prohibited from paying dividends on its common shares if those dividends would result in a breach of the term loan. Trade Marks was in compliance with all of its financial covenants as at May 1, 2018, March 25, 2018 and December 31, Trade Marks uses an interest rate swap agreement to manage risks from fluctuations in interest rates and facilitate uniform monthly distributions. This instrument is used only for risk management purposes. Under the interest rate swap, the term loan bears interest at 4.2% per annum, comprised of 2.8% per annum which is fixed under the swap agreement until December 22, 2022, plus a 1.4% per annum credit charge which, depending on the future performance of the business will be reduced to 1.15% or as low as 0.9%. The fair value of this interest rate swap as at March 25, 2018 was $806,000 unfavourable (December 31, $1,465,000 unfavourable) and the change in fair value is recorded in the consolidated statements of income as a gain on the interest rate swap. A general security agreement over the assets of Trade Marks has been provided as collateral for the demand operating loan facility and term loan. The Partnership has provided its guarantee in favour of the Bank of all of the indebtedness, covenants and obligations of Trade Marks to the Bank. 15

18 The following is a summary of contractual obligations payable by the Fund: Payments due by period Less than After 5 (dollars in thousands) Total 1 year years years years Term loan $60,000 $0 $0 $60,000 $0 The Fund, Trade Marks and the Partnership have no other contractual or purchase obligations except as described under the section Related Party Transactions and Balances. The Fund, Trade Marks and the Partnership do not have any capital expenditures; their operating and administrative expenses are expected to be stable and reasonably predictable and are considered to be in the ordinary course of business. OFF-BALANCE SHEET ARRANGEMENTS The Fund, Trade Marks and the Partnership have no off-balance sheet arrangements. RELATED PARTY TRANSACTIONS AND BALANCES During the period, royalty income of $8,031,000 ( $7,355,000) was earned from Food Services of which $2,762,000 (December 31, $2,742,000) is receivable at March 25, During the period, Trade Marks declared and paid dividends to Food Services of $1,118,000 ( $943,000). The $559,000 dividend declared on March 5, 2018 and paid on March 30, 2018 is reported as a current liability as at March 25, Other related party transactions and balances are referred to elsewhere in this MD&A. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS A significant area requiring the use of a management estimate is the fair value of the interest rate swap. However, this estimate is not a critical accounting estimate as (i) it does not require the Fund to make assumptions about matters that are highly uncertain at the time the estimate is made, and (ii) a different estimate that could have been used, or changes in the accounting estimates that are reasonably likely to occur from period to period, would not have had a material impact on the Fund s financial condition, changes in financial condition or financial performance. The fair value of the interest rate swap as at March 25, 2018 was $806,000 unfavourable (December 31, $1,465,000 unfavourable) and the change in fair value is recorded in the consolidated statements of income as a gain on interest rate swaps. INTERNAL CONTROL OVER FINANCIAL REPORTING The Chief Executive Officer and the Chief Financial Officer have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of the Fund s financial reporting and the preparation of its financial statements for external purposes in accordance with the Fund s generally accepted accounting principles. The control framework used to design the Fund s internal control over financial reporting is Internal Control Integrated Framework: 2013 which was released in May 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 16

19 There has been no change in the Fund s internal controls over financial reporting during the period covered by this MD&A that has materially affected, or is reasonably likely to materially affect, the Fund s internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. RISKS AND UNCERTAINTIES Information with regards to the risks and uncertainties applicable to the business operations of the Fund is contained in the Fund s most recent Annual Information Form under the heading Risk Factors. Additional risks and uncertainties not currently known to the Trustees of the Fund or that are currently not considered to be material also may impair the Fund s business operations. If any of the risks actually occur, the Fund s business, results of operations and financial condition, and the amount of cash available for distribution to Unitholders, could be adversely affected. OUTLOOK Food Services remains committed to its mission to delight time-crunched Canadian burger lovers with the joy of great tasting natural food, made by people they trust. Continued focus on its strategic initiatives, including repositioning and differentiating the A&W brand through the use of better ingredients ; accelerating new restaurant growth, and delivering an industry leading guest experience, has delivered strong results and improved market share in the quick service restaurants (QSR) burger market. Since 2013 A&W has been a leader in the QSR industry, sourcing simple, all-natural ingredients that guests can feel good about. Food Services was the first national QSR in Canada to use only beef raised without the use of hormones and steroids, free of additives, fillers or preservatives. A&W s beef is primarily grass-fed and any feed provided is strictly vegetarian. And the whole Burger Family from Baby to Uncle to Grandpa contains 100% pure beef. The following year, Food Services began to serve only chicken raised without the use of antibiotics and fed a grain-based diet without animal by-products. All of the chicken menu items on Food Services menu are made with seasoned 100% chicken breast, without fillers. Also in 2014, Food Services enhanced its breakfast menu by moving to eggs from hens fed a fully vegetarian diet without animal by-products. In January 2015 organic and Fair Trade coffee was introduced, another first for a national QSR in Canada. In 2016, Food Services became the first national QSR in Canada to use bacon from pork that is raised without the use of antibiotics, and announced that A&W restaurants switched to French s ketchup and mustard, made with 100% Canadian tomatoes and 100% Canadian mustard seeds. In 2017, A&W launched the new Root Beer Guarantee. A&W Root Beer served in the restaurants is now made from natural cane sugar and all-natural flavours - another first for the QSR industry. Menu innovations are important to A&W s success. In February 2017, all-day breakfast was launched. In 2018, breakfast promotions have featured the All Canadian Special and the Classic Breakfast Combo. Additional limited time offers in 2018 have included Cheddar Jalapeno Burgers and Eggers and 56 Burgers. A&W continues to offer the Pick Your Perfect Size first introduced in 2017 in connection with the limited time burger promotions, allowing guests to 17

20 enjoy feature burgers in a size of their choice. These menu items have been well received by Food Services guests. Food Services second strategic initiative is accelerating the pace of growth of new A&W restaurants, particularly in the key Ontario and Quebec markets. Seven new A&W restaurants were opened across the country in Q As of March 25, 2018, an additional seventy are under construction or in varying stages of permitting. A third strategic initiative of Food Services is to deliver an industry leading guest experience. To ensure each guest at an A&W restaurant has a positive experience, Food Services has introduced changes in its satisfaction measurement and feedback systems, system level processes, staffing, CLIMATE, and restaurant equipment. This initiative also includes the ongoing re-imaging and modernizing of our existing restaurants, and innovation in technology. Including the new restaurants opened in the new design since the beginning of the re-image program, approximately 94% of A&W s restaurants now have the new design. New Good Food Makes Good Food interior elements are also being introduced in restaurants to communicate Food Services ingredients guarantee to its guests. Costs of re-imaging A&W restaurants are borne by the franchisees and there is no cost to the Fund. Food Services is also striving to lead the industry in minimizing its environmental footprint. Changes have been made to food packaging and dine-in customers are served with ceramic and glass mugs for hot and cold beverages, metal baskets for fries and onion rings, ceramic bowls for poutine and ceramic plates and stainless steel cutlery for breakfast in an effort to reduce waste going to landfills. Looking ahead for the remainder of 2018, Food Services plans to continue to focus on key strategies that accelerate trial and drive guest counts, which, in combination with the work to improve guest experience, aim to fuel additional visits and build loyalty. These initiatives are expected to build the competitiveness of the A&W brand and to enhance performance over the long term. FORWARD LOOKING INFORMATION Certain statements in this MD&A contain forward-looking information within the meaning of applicable securities laws in Canada (forward-looking information). The words anticipates, believes, budgets, could, estimates, expects, forecasts, intends, may, might, plans, projects, schedule, should, will, would and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. The forward-looking information in this MD&A includes, but is not limited to: expected future consideration payable on adjustments to the Royalty Pool; management s expectation that its refundable income tax will be recovered in future years when sufficient dividends are paid by Trade Marks; the Fund s objective to maintain an annual payout ratio at or below 100%; Food Services plans to reposition and differentiate A&W in the QSR industry through its use of better ingredients, accelerating new restaurant growth, and delivering an industry leading guest experience; the Fund s policy to distribute all available cash in order to maximize returns to unitholders over time, after allowing for reasonable reserves; any change in the Fund s distributions will be implemented with a view to maintain the continuity of uniform 18

21 monthly distributions; the Fund expects that future distributions will continue to be funded entirely by cash flow from operations and the cash reserve; the operating and administrative expenses of the Fund, Trade Marks and the Partnership are expected to be stable and reasonably predictable; the Fund, through dividends from Trade Marks, is expected to have sufficient financial resources to pay future distributions; and, the number of new A&W restaurants under construction and the expected timing for their opening. The forward looking information is based on various assumptions that include, but are not limited to: the general risks that affect the restaurant industry will not arise; there are no changes in availability of experienced management and hourly employees; there are no material changes in government regulations concerning menu labelling and disclosure and drive-thru restrictions; no publicity from any food borne illness; no material changes in competition; no material changes in the quick service restaurant burger market including as a result of changes in consumer taste or health concerns or changes in economic conditions or unemployment or a disease outbreak; no material impact on sales from closures of anchor stores in shopping centres; no material increases in food and labour costs; the continued availability of quality raw materials; continued additional franchise sales and maintenance of franchise operations; Food Services is able to continue to grow same store sales; Food Services is able to maintain and grow the current system of franchises; Food Services is able to locate new retail sites in prime locations; Food Services is able to obtain qualified operators to become A&W franchisees; no closures of A&W restaurants that materially affect the amount of the Royalty; no material changes in traffic patterns at shopping centres; no supply disruptions; franchisees duly pay franchise fees and other amounts; no material impact from new or increased sales taxes upon gross sales; continued availability of key personnel; continued ability to preserve intellectual property; no material litigation from guests at A&W restaurants; Food Services continues to pay the Royalty; Trade Marks continues to pay dividends on the common shares and the Partnership continues to make distributions on its units; Trade Marks can continue to comply with its obligations under its credit arrangements; and, Trade Marks performance does not fluctuate such that cash distributions are affected. The forward-looking information is subject to risks, uncertainties and other factors related to the quick service restaurant industry that include, but are not limited to: the general risks that affect the restaurant industry in general and the quick service segment in particular; changes in consumer preferences that adversely affect the consumption of quick service restaurant hamburgers, chicken, fries, breakfast items or soft drinks; negative publicity, litigation or complaints from perceived or actual food safety events or other events involving the foodservice industry in general or A&W restaurants in particular; changes in the availability and quality of raw materials, including A&W s better ingredients; changes in climate or increases in environmental regulation; changes in Food Services ability to continue to grow same store sales, locate new retail sites in prime locations and obtain qualified operators to become A&W franchisees; 19

22 increases in closures of A&W restaurants adversely affecting the royalty; decreases in traffic at shopping centers; changes in Food Services ability to pay the royalty due to changes in A&W franchisees ability to generate sales and pay franchise fees and other amounts to Food Services; changes in government regulation that affects the restaurant industry in general or the quick service restaurant industry in particular; changes in the availability of key personnel, including qualified franchise operators; changes in the ability to enforce or maintain intellectual property; risks related to technological breakdowns and cybersecurity breaches; risks related to the amplificatory effects of media and social media; and, increases in catastrophic events. The forward-looking information is subject to risks, uncertainties and other factors related to the structure of the Fund that include, but are not limited to: dependence of the Fund on Trade Marks, Partnership and Food Services; dependence of the Partnership on Food Services; risks related to leverage and restrictive covenants; the risk that cash distributions are not guaranteed and will fluctuate with the Partnership s performance; risks related to the nature of units; risks related to the distribution of securities on redemption or termination of the Fund; risks related to the Fund issuing additional units diluting existing unitholders interests; and, risks related to income tax matters. These risks, uncertainties and other factors are more particularly described above under the heading Risks and Uncertainties and in the Fund s most recent Annual Information Form under the heading Risk Factors. All forward-looking information in this MD&A is qualified in its entirety by this cautionary statement and, except as required by law, the Fund undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof. 20

23 A&W Revenue Royalties Income Fund Interim Condensed Consolidated Balance Sheets Unaudited (in thousands of dollars) March 25 December 31 Note Assets Current assets Cash and cash equivalents $ 4,422 $ 2,534 Accounts receivable 9 2,762 2,742 Prepaid interest ,659 5,667 Non-current assets Intangible assets 3 275, ,933 Total assets $ 283,581 $ 255,600 Liabilities Current liabilities Accounts payable and accrued liabilities $ 528 $ 476 Dividends payable to A&W Food Services of Canada Inc Distributions payable to Unitholders 7 1,701 1,701 Income taxes payable ,960 2,331 Non-current liabilities Term loan 4 59,844 59,836 Fair value of interest rate swap ,465 Deferred income tax liabilities 13,013 12,784 Other liabilities 3 5,198-81,821 76,416 Unitholders' Equity Fund Units 5 263, ,452 Accumulated deficit (155,067) (156,589) 108, ,863 Non-controlling interest 93,375 72,321 Total equity 201, ,184 Total liabilities and equity $ 283,581 $ 255,600 Subsequent events 10 The accompanying notes form an integral part of these financial statements. 21

24 A&W Revenue Royalties Income Fund Interim Condensed Consolidated Statement of Income and Comprehensive Income Unaudited (in thousands of dollars except per Unit amounts) Gross sales reported by A&W restaurants in the Royalty Pool Note $ 267,688 $ 245,157 Royalty income $ 8,031 $ 7,355 Expenses General and administrative Interest expense Term loan and other Amortization of financing fees Operating income 7,122 6,472 Gain on interest rate swap 4 (659) (38) Net income before income taxes 7,781 6,510 Provision for (recovery of) income taxes 6 Current Current income tax provision 1,360 1,193 Refundable income tax (113) (150) Deferred Net income and comprehensive income for the period Net income and comprehensive income attributable to: 1,476 1,086 $ 6,305 $ 5,424 Unitholders of A&W Revenue Royalties Income Fund $ 4,924 $ 4,183 A&W Food Services of Canada Inc.'s non-controlling interest in A&W Trade Marks Inc. Period from Period from Jan 1, 2018 to Jan 1, 2017 to Mar 25, 2018 Mar 26, ,381 1,241 $ 6,305 $ 5,424 Basic and diluted income per weighted average Unit outstanding $ $ Weighted average number of Units outstanding 12,504,673 12,232,384 The accompanying notes form an integral part of these financial statements. 22

25 A&W Revenue Royalties Income Fund Interim Condensed Consolidated Statement of Unitholders' Equity Unaudited (in thousands of dollars) Accumulated Note Fund Units deficit Total Noncontrolling interest Total equity Balance - December 31, 2016 $ 248,800 $ (151,694) $ 97,106 $ 62,289 $ 159,395 Net income for the period - 4,183 4,183 1,241 5,424 Distributions on Units - (3,276) (3,276) - (3,276) Dividends on common shares (943) (943) Issue of common shares ,037 12,037 Common shares exchanged for units 5 14,652 (6,838) 7,814 (7,814) - Balance - March 26, 2017 $ 263,452 $ (157,625) $ 105,827 $ 66,810 $ 172,637 Net income for the period - 17,780 17,780 5,016 22,796 Distributions on Units - (16,744) (16,744) - (16,744) Dividends on common shares (4,741) (4,741) Issue of common shares ,236 5,236 Balance - December 31, 2017 $ 263,452 $ (156,589) $ 106,863 $ 72,321 $ 179,184 Net income for the period - 4,924 4,924 1,381 6,305 Distributions on Units 7 - (3,402) (3,402) - (3,402) Dividends on common shares (1,118) (1,118) Issue of common shares ,791 20,791 Balance - March 25, 2018 $ 263,452 $ (155,067) $ 108,385 $ 93,375 $ 201,760 A&W Revenue Royalties Income Fund Interim Condensed Consolidated Statement of Cash Flows Unaudited (in thousands of dollars) Note Period from Jan 1, 2018 to Mar 25, 2018 Period from Jan 1, 2017 to Mar 26, 2017 Operating activities Net income for the period $ 6,305 $ 5,424 Adjustments for: Non-cash gain on interest rate swap 4 (659) (38) Amortization of financing fees 8 8 Deferred income tax expense Refundable income tax recovery (113) (150) Interest expense Current income tax provision 1,360 1,193 Net changes in items of non-cash working capital 32 (35) Interest paid (678) (647) Income tax paid (1,229) (960) Net cash generated from operating activities 5,849 5,442 Financing activities Repayment of demand operating loan facility 4 - (490) Dividends paid to non-controlling interest (559) (496) Distributions paid to Unitholders (3,402) (3,226) Net cash used in financing activities (3,961) (4,212) Increase in cash and cash equivalents 1,888 1,230 Cash and cash equivalents - beginning of period 2,534 1,751 Cash and cash equivalents - end of period $ 4,422 $ 2,981 The accompanying notes form an integral part of these financial statements. 23

26 A&W Revenue Royalties Income Fund Notes to Interim Condensed Consolidated Financial Statements (Unaudited) March 25, 2018 (in thousands of dollars) 1. General information A&W Revenue Royalties Income Fund (the Fund) is a limited purpose trust established on December 18, 2001 with an unlimited number of Trust Units (Units) under the laws of the Province of British Columbia pursuant to the Declaration of Trust. The Fund is listed on the Toronto Stock Exchange under the symbol AW.UN. The Fund s place of business is located at West Esplanade, North Vancouver, BC. The Fund was established to invest in A&W Trade Marks Inc. (Trade Marks), which through its ownership interest in A&W Trade Marks Limited Partnership (the Partnership) owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. 2. Basis of preparation These interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as applicable to interim financial reports including International Accounting Standards (IAS) 34, Interim Financial Reporting. The interim condensed consolidated financial statements do not include all of the information and disclosures required in the annual financial statements, and should be read in conjunction with the Fund s audited annual consolidated financial statements as at December 31, The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Fund s annual consolidated financial statements for the year ended December 31, 2017, with the exception of the adoption of IFRS 9, Financial Instrument and IFRS 15, Revenue from Contracts with Customers. IFRS 9 Financial Instruments The Fund has adopted IFRS 9 effective January 1, 2018, retrospectively without restatement of comparatives. The new standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The Fund classifies all its financial assets and liabilities at amortized cost. Under IFRS 9, the Fund assesses on a forward looking basis the expected credit losses associated with financial assets carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Fund applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. The adoption of this standard had no impact on the consolidated financial statement and no adjustments to opening retained earnings as at January 1, 2018 were necessary. IFRS 15 Revenue from Contracts with Customers The Fund has adopted IFRS 15 effective January 1, 2018, using the full retrospective method without the use of practical expedients. The timing of the recognition of revenue has not changed as a result of adopting the new guidance. The adoption of this standard had no 24

27 A&W Revenue Royalties Income Fund Notes to Interim Condensed Consolidated Financial Statements (Unaudited) March 25, 2018 (in thousands of dollars) impact on the consolidated financial statement and no adjustments to opening retained earnings as at January 1, 2018 were necessary. These interim condensed consolidated financial statements were authorized for issue by the Board of Trustees of the Fund on May 1, Intangible assets Royalty Amount Pool $ Balance as at December 31, ,933 Annual adjustment January 5, ,989 Balance as at March 25, ,922 The intangible assets are the A&W trade-marks used in the A&W quick service restaurant business in Canada. The Partnership has granted A&W Food Services of Canada Inc. (Food Services) a licence (the Amended and Restated Licence and Royalty Agreement) to use the A&W trade-marks in Canada for a term expiring December 30, 2100, for which Food Services pays a royalty of 3% of sales reported to Food Services by specific A&W restaurants (the Royalty Pool). The Royalty Pool is adjusted annually to reflect sales from new A&W restaurants, net of the sales of any A&W restaurants that have permanently closed. Food Services is paid for the additional royalty stream related to the sales of the net new restaurants, based on a formula set out in the Amended and Restated Licence and Royalty Agreement. The formula provides for a payment to Food Services based on 92.5% of the amount of estimated sales from the net new restaurants and the current yield on the Units of the Fund, adjusted for income taxes payable by Trade Marks. The consideration is paid to Food Services in the form of additional limited partnership units (LP units). The additional LP units are, at the option of Food Services, exchangeable for additional shares of Trade Marks which are in turn exchangeable for Units of the Fund on the basis of two common shares for one Unit of the Fund. The consideration paid for the annual adjustment to the Royalty Pool is recorded as an increase in the value of the A&W trade-marks. The 2018 annual adjustment to the Royalty Pool took place on January 5, The number of A&W restaurants in the Royalty Pool was increased by 42 new restaurants less seven restaurants that permanently closed during The estimated annual sales of the 42 new A&W restaurants are $55,642,000 and annual sales for the seven permanently closed restaurants were $3,210,000. The initial consideration for the estimated additional royalty stream was $25,989,000, calculated by discounting the estimated additional royalties by 7.5% and dividing the result by the yield on the units of the Fund for the 20 trading days ending October 30, The yield was adjusted to reflect the income tax payable by Trade Marks. The Partnership paid Food Services 80% of the initial consideration or $20,791,000, 25

28 A&W Revenue Royalties Income Fund Notes to Interim Condensed Consolidated Financial Statements (Unaudited) March 25, 2018 (in thousands of dollars) by issuance of 596,251 LP units which were subsequently exchanged for 1,192,502 nonvoting common shares of Trade Marks. The remaining 20% of the consideration or $5,198,000 will be paid in December 2018 by issuance of additional LP units, which may be exchanged for non-voting common shares of Trade Marks. The actual amount of the consideration paid in December 2018 may differ from this amount depending on the actual annual sales reported by the new A&W restaurants. 4. Term loan, operating loan facility and interest rate swap Trade Marks has a $2,000,000 demand operating loan facility with HSBC Bank Canada (the Bank) to fund working capital requirements and for general corporate purposes. Amounts advanced under the facility bear interest at the bank prime rate plus 0.4% and are repayable on demand. As at March 25, 2017, the amount of the facility available was $2,000,000 (December 31, $2,000,000). On December 22, 2017, Trade Marks entered into an agreement to refinance its $60,000,000 term loan with the Bank. The original term loan matured on December 22, 2017 and the new term loan is repayable on December 22, The new term loan contains the same covenants as the original term loan, including the requirement to meet certain earnings before interest, taxes, depreciation, amortization and non-cash charges/income (EBITDA) levels and debt to EBITDA ratios during each trailing four quarter period. Interest only is payable monthly, providing that Trade Marks EBITDA tested quarterly on a trailing four quarter basis is not less than specified amounts. In the event that EBITDA is less than these specified amounts, the term loan will be fully amortized over the greater of three years and the remaining term and repayment will be by way of blended monthly instalments of principal and interest. Trade Marks was in compliance with all of its financial covenants as at March 25, 2018 and December 31, Trade Marks uses interest rate swap agreements to manage risks from fluctuations in interest rates. Trade Marks has entered into an interest rate swap, with an effective date of December 22, 2015 and a maturity date of December 22, Under this interest rate swap, the term loan bears interest at 4.2% per annum, comprising 2.8% per annum which is fixed under the swap agreement until December 22, 2022 plus a 1.4% per annum credit charge. The fair value of this interest rate swap as at March 25, 2018 was $806,000 unfavourable (December 31, $1,465,000 unfavourable) and the change in fair value is recorded in the consolidated statements of income as a gain on interest rate swaps. Trade Marks continues to fair value the interest rate swap as a Level 3 financial instrument. There have been no changes to the valuation techniques in the period. A general security agreement over the assets of Trade Marks has been provided as collateral for the demand operating loan facility and term loan. The Partnership has provided its guarantee in favour of the Bank of all the indebtedness, covenants and obligations of Trade Marks to the Bank. 26

29 A&W Revenue Royalties Income Fund Notes to Interim Condensed Consolidated Financial Statements (Unaudited) March 25, 2018 (in thousands of dollars) The term loan comprises: 5. Fund Units March 25, 2018 $ December 31, 2017 $ Term loan 60,000 60,000 Financing fees (156) (164) 59,844 59,836 On March 3, 2017, Food Services exchanged 746,600 common shares of Trade Marks for 373,300 Units of the Fund, which were then sold at a price of $39.25 per Unit. The Fund did not receive any proceeds of the sale of the Units. Following the sale of these Units, Food Services owned approximately 21.2% of the Units of the Fund on a fully-diluted basis. Number of Units Equity $ Balance - December 31, ,131, ,800 Units issued in exchange for common shares of A&W Trade Marks Inc. 373,300 14,652 12,504, ,452 Following the 2018 annual adjustment to the Royalty Pool on January 5, 2018, Food Services owns approximately 24.7% of the Units of the Fund on a fully-diluted basis. 6. Income Taxes The Fund as a legal entity is not subject to the Specified Investment Flow-Through (SIFT) tax, as its only source of income is dividends from Trade Marks which are not subject to SIFT tax. The provision for income taxes shown in the consolidated statements of income is the expected current and deferred tax payable by Trade Marks, and differs from the amount obtained by applying statutory tax rates to Trade Marks income before income taxes for the following reasons: 27

30 A&W Revenue Royalties Income Fund Notes to Interim Condensed Consolidated Financial Statements (Unaudited) March 25, 2018 (in thousands of dollars) March 25, 2018 $ March 26, 2017 $ Statutory combined federal and provincial income tax rates on investment income 20.0% 19.0% Provision for current income tax taxes provision Provision for deferred income 1,360 1,193 Provision for income taxes based on statutory income tax rates 1,589 1,236 Refundable income tax (113) (150) Provision for income taxes 1,476 1,086 Trade Marks taxable income is taxed at an effective rate of 20.0% ( %), plus an additional tax of 30.67% on investment income that has not been distributed to its shareholders as dividends. This additional tax is refundable in a future year when Trade Marks pays sufficient dividends. Under IFRS, refundable income tax is required to be expensed on the income statement when paid or payable. Subsequently, these amounts are recognized on the income statement as income taxes recoverable when received or receivable. 7. Distributions During the period ended March 25, 2018, the Fund declared distributions to its Unitholders of $3,402,000 or $0.272 per Unit. The record dates and amounts of these distributions are as follows: Month Record date Amount Per unit $ $ January 2018 February 15, , February 2018 March 15, , , The February 2018 was declared on March 5, 2018 and paid on March 30, 2018, and is reported as a current liability as at March 25, Compensation to key management Key management personnel are the Trustees of the Fund. During the period, the Trustees earned $32,000 ( $25,000). 28

31 A&W Revenue Royalties Income Fund Notes to Interim Condensed Consolidated Financial Statements (Unaudited) March 25, 2018 (in thousands of dollars) 9. Related party transactions and balances During the period, royalty income of $8,031,000 ( $7,355,000) was earned from Food Services of which $2,762,000 (December 31, $2,742,000) is receivable at March 25, During the period, Trade Marks declared common share dividends payable to Food Services of $1,118,000 ( $943,000). The $559,000 dividend declared on March 5, 2018 and paid to Food Services on March 30, 2018 is reported as a current liability as at March 25, 2018 (December 31, $nil). Other related party transactions and balances are referred to elsewhere in these notes. 10. Subsequent events On April 4, 2018, the Fund declared a distribution to Unitholders of $0.136 per unit or $1,701,000, payable on April 30, 2018 to Unitholders of record as at April 15, On April 4, 2018, Trade Marks declared common share dividends of $559,000 payable to Food Services and the Fund on April 30,

32 Unitholder Information Corporate Head Office A&W Trade Marks Inc. c/o 26 th Floor Toronto-Dominion Bank Tower 700 West Georgia Street Vancouver, BC, V7Y 1B3 Mailing Address A&W Revenue Royalties Income Fund West Esplanade North Vancouver, BC, V7M 3K9 A&W Revenue Royalties Income Fund Board of Trustees John R. McLernon (1) Richard N. McKerracher (1) Hugh R. Smythe (1) Market Information Units Listed: Toronto Stock Exchange Symbol: AW.UN Registrar and Transfer Agent Computershare Investor Services Inc. Investor Enquiries Don Leslie Chief Financial Officer Tel: Fax: Website: A&W Trade Marks Inc. Board of Directors John R. McLernon (2) Chairman Richard N. McKerracher (2) Hugh R. Smythe (2) Paul F.B. Hollands David A. Mindell Committees of the Board (1) Audit Committee and (2) Governance Committee 30